Steps To Starting A Small Business
Will you be able to produce and sell your goods or services in sufficient volumes and at a price which will make it financially rewarding?
You must decide what your personal goals are in terms of growth on the business and financial returns. Questions you have already answered about your ability as a business-person will help you decide if a business idea is right for you.
The most effective way to organize your thoughts and fully develop your business idea is to prepare a comprehensive business plan. This plan will help you to think about all aspects of the business, and may help you to avoid costly oversights. The business plan also provides the basis for evaluating the viability of your proposal. Be thorough, accurate and concise as you work your way through the business plan elements described below. The elements don't have to be completed in order.
Your business plan will contain the following sections:
Start with a brief description of the the business. This gives potential investors and others the information to determine the kind of opportunity your business represents. Avoid technical terms and jargon. Highlight the competitive advantages of your business over others in the field. If the plan concerns an existing business (modernization or expansion) give a brief history of successes and failures.
Describe the existing or proposed products or services. Avoid technical terms and highlight the key features that will distinguish the products or services from competitors. Products may be described as a collection of attributes (size, color, shape, materials, etc.) which produce various benefits (slices, dices, chops, etc.). The status of patent, trademark, and other protection should be addressed in this section.
The marketing section of the business plan is one of the most important and challenging sections to prepare. Describe who will buy your product or service and why. Support your claims. Wherever possible, you should verify statements with valid market research results. Include a description of consumer behavior (who will buy your product, where, when, for what price, what will they use it for, how often will they purchase). Other information necessary in the marketing section includes:
location of markets
proposed pricing strategy (e.g. skimming vs. mass marketing)
competition (direct and indirect)
distribution strategy
Investors will place a great deal of importance on the proposed management of the business. Describe your own background, as well as that of key employees and managers. Include any special skills that will help make the business a success.
Describe how you plan to manufacture the product or distribute the service. Describe any special equipment or processes involved. Cover items such as facilities, equipment, labor, materials, sources of supply, materials handling and storage. Highlight critical stages of the production/delivery process.
Financial statements should include a projected balance sheet, income statement and cash flow statement for the first five years, with the first year broken down monthly. Provide a detailed list of assumptions included in the financial projections, as well as a statement of the cost to develop the product or service.
Describe the amount of investment required, and the timing of cash requirements. Detail the sources of funding and the purpose. Outline the repayment terms of borrowed funds. Pay particular attention to long-term capital costs versus operating costs (working capital).
Once a business plan is completed, it may be possible to further analyze your proposed operations. Market research should provide you with a range of prices that consumers will accept, as well as a detailed cost to produce the product or service. Fixed costs include any of the costs of doing business that remain the same while levels of production and sales increase. Examples include equipment costs, rent, utilities, advertizing, and salaries as long as the payroll remains constant. Variable costs include those items that can change and include such items as repair costs and the cost of materials. The level of output required to break even can be calculated in a break-even analysis based on the fixed costs and variable costs.
Assume you own a pencil making machine. Your fixed costs such as salary, utilities, and rent, total $100,000 per year. Variable costs such as materials and machine maintenance total 40 cents per pencil. Each pencil sells for 80 cents. Using the formula:
break-even =
total fixed costs
selling price per unit - variable cost per item
= $100,000
$(.80-.40)= 250,000 pencils per year to break even